As noted by jacmet in bug 824:

svn 14777 seems to have broken cramfs/squashfs/tarroot.

The problem is that $(IMAGE) is the absolute path of the image including
directories, so the build tries to access
$(STAGING_DIR)/_fakeroot.</full/path/to/buildroot/directory> which doesn't
exist.

The fix is to define CRAMFS/SQUASHFS/TAR_TARGET as $(notdir
$(IMAGE).<extension>) instead.